When the lowest pay rises, what happens?

WORCESTER, MASS.
— Massachusetts raised its minimum wage last week and for Felicita Rivera that inspires a simple hope: that she'll be able to keep her head above water financially.

For the past seven years, her pay at the small manufacturing plant where she works was stuck at the state minimum of $6.75 an hour, she says. The new state floor of $7.50 an hour means an extra $100 or so each month. But for Mrs. Rivera it's more about trying to stay even than trying to get ahead. The rent on her apartment is set to rise in February, also by $100 a month.

The experience of this worker, and this state, hints at the kinds of results that America can expect from a hike in the federal minimum wage. In Congress, Democratic leaders have planned a House vote Wednesday for the first such raise in a decade.

Debates over raising the minimum wage usually go something like this: Supporters say it will improve the standard of living for low-wage workers. Foes warn that it will force businesses to raise prices for their goods and services and employ fewer people. While there's some truth in both arguments, the larger reality is that most changes in the minimum wage are relatively modest, and so are the results.

For example: After 19 years working at the minimum hourly rate in the same factory, Rivera hasn't lost her job, even though the wage floor has risen several times. But she also doesn't feel her standard of living has improved.

Similarly, for the state of Massachusetts, the economy hasn't imploded, despite seven years with a minimum wage 31 percent above the federal floor of $5.15. But poverty hasn't disappeared, either.

"Both critics and advocates of the minimum wage have exaggerated its effects," says Isabel Sawhill, an economist at the Brookings Institution in Washington. "It doesn't do a great deal of harm. At the same time, it's no panacea for the low earnings of less-skilled workers."

This view, shared by many economists, doesn't mean that setting the wage floor is merely symbolic.

When the wage floor is raised, workers at the bottom of the pay ladder, like Rivera, see a direct and immediate rise in purchasing power.

And employers like Mark Waxler face new costs, which can push up consumer prices and curb the creation of new jobs.

Mr. Waxler runs the 73-room Beechwood Hotel in Worcester, a couple of miles from where Rivera works.

He says the 20 housekeepers and dishwashers on his staff are paid at least $8 an hour currently, so his payroll costs didn't jump last week as the state law kicked in.

But as workers at the bottom of the state's income ladder get a raise, dishwashers and housekeepers at the Beechwood could be expecting higher pay, too. Moreover, by next year, the Massachusetts minimum wage is set to rise again, to $8 an hour. At that point, if all low-wage workers are earning close to what Waxler pays, his salaries may need to rise to retain the quality of staff he wants. The result: Guests would face higher room rates.

And if wages rise too much, the impact on businesses could widen.

"You can only increase pricing so much" before it affects hotel occupancy and dining-room sales, Waxler says. "You end up having to cut people or cut services just to survive."

He's not opposed to a wage floor. "You don't want anybody to have to worry about poverty," he says. Waxler is simply pointing out that there's no free lunch for the economy.

A central tenet of economics holds that markets find an equilibrium of supply and demand. When the price of something goes up, demand goes down and a new equilibrium is reached.

This happens gradually, not so much due to layoffs as to slower job creation.

"It's hard to find workers who lost their jobs" because of a boost in minimum pay, says David Neumark, an economist at the University of California at Irvine.

When the minimum wage rises, "it's not just free manna from heaven," says Tom MaCurdy, a Stanford University economist affiliated with the conservative Hoover Institution. Prices of goods must rise as a result, he says, and often those are the very goods that low-wage workers buy. Some other costs may also fall on low-wage workers themselves, if employers respond by eliminating jobs or cutting spending on benefits and training.

Still, when all the effects are tallied up, economists say that the lowest-wage workers do get a real pay raise.

A pay raise – and a rent increase

For Rivera, the latest increase comes at a crucial time, just before her monthly rent jumps from $656 to $760.

Few US workers stay in minimum-wage jobs for as long as she has worked at the small assembly plant near her home. "I stay because I don't know much English," she says through an interpreter. "And I can walk there, so I don't have to pay for the bus."

The Puerto Rico native has raised five children, and still has two teenage sons at home. Ever since her husband died eight years ago, she's been living on her own income plus a Social Security check, which she gets as a widow.

Active with an organization called Neighbor to Neighbor, she testified at the Massachusetts State House to push for the pay hike she is now getting. But she knows, also, that her employer, Customatic, can only afford to pay so much. At some point, she worries, her job could disappear or move overseas.

To be sure, not everyone on minimum wage is poor. The low-wage workforce also includes many people – teens or adults – who live in households with other breadwinners.

A broader array of policies would be needed to reduce poverty in the US, economists say. Dr. Sawhill of Brookings says these include a higher earned-income tax credit, child-care assistance for working parents, and programs to encourage marriage and discourage teen pregnancy.

Promoting more work hours is a major piece of the puzzle.

"If the heads of poor households worked as much as the heads of nonpoor households, it would have quite a dramatic effect," probably a 40 percent reduction in poverty, she says.

But a higher minimum wage is also part of her proposed package. To many people, experts and nonexperts alike, the minimum represents a moral imperative.

"We need to have a floor," says Noah Berger of the Massachusetts Budget and Policy Center in Boston. "People who work full time to support a family should be able to do so."

What might a national minimum of $7.25 mean for the economy?

One economist, George Treyz, recently revved up his computer models of the economy in a bid to find out. The firm he heads, Regional Economic Models Inc. in Amherst, Mass., specializes in such forecasts.

His model suggests some of the complex ripple effects – and the possible magnitude of changes. The study predicts that, two years after the minimum of $7.25 goes into effect, total employment in the US would fall by 0.17 percent. That's roughly the loss of one job in every 600.

"It's a significant redistribution of income" to several million low-wage workers, Mr. Treyz says. Meanwhile, "there is some very small amount that it costs people in general" throughout the economy.

Wage hike would nudge up prices

The pay raise would push up consumer prices by 0.35 percent. That would make it harder for US companies to sell exports overseas. The upshot: Thanks to inflation and weaker trade performance, the nation's real disposable income would fall slightly, by 0.14 percent.

The impacts of a minimum-wage hike would be much bigger in some states than others, Treyz found. The smallest effects would show up in places like Massachusetts, which already have wage floors higher than $5.15 per hour.

While he has used forecasting techniques, other economists have tried to understand the minimum wage by analyzing the track record of real-life data.

Despite opportunities to compare states with high minimum wages and those at $5.15 an hour, researchers have had a hard time pinning down the precise effects of a wage hike.

In any given state, the course of jobs, incomes, and prices is driven by many forces, and the minimum wage generally has only a bit part to play.

For Waxler's part, he says the health of the overall economy is what's driven him to add or cut jobs in the hotel business over the past 27 years, not changes in the minimum wage.

But the higher the minimum goes, the greater the dampening effect on jobs, says Rebecca Blank of the National Poverty Center in Ann Arbor, Mich.

Still, "it's not nearly as costly as economists used to think," says David Autor, a labor expert at the Massachusetts Institute of Technology in Cambridge.